Equity Trading Markets

Question 1

If an investor is short stock, a buy stop order can be used to limit _________ risk.

Answer 1

If an investor is short stock, a buy stop order can be used to limit upside risk.

Question 2

Order is entered to sell 1,000 ABC at 50 stop. Trades occur at 50.10…50.03…50…49.98…49.90. The trigger price is:

Answer 2

$50 (at the stop price)

Question 3

Trading on material, non-public information is considered ________ ________.

Answer 3

Trading on material, non-public information is considered insider trading.

Question 4

_______________ following the trade date is the settlement for trades involving corporate or municipal securities.

Answer 4

3 business days (T+3) following the trade date is the settlement for trades involving corporate or municipal securities.

Question 5

Define painting the tape.

Answer 5

Traders effecting transactions back and forth to create a misleading appearance of activity

Question 6

Stop and stop-limit orders are triggered when a round lot trades at, or through, the _____ ______.

Answer 6

Stop and stop-limit orders are triggered when a round lot trades at, or through, the stop price.

Question 7

Can a stop-limit order have a different stop and limit price?

Answer 7

Yes, e.g., Sell 500 ABC at 50 stop-49.50 limit triggers at or through 50. Then the investor will sell at 49.50 or above.

Question 8

What are the two ways order tickets can be marked when selling securities?

Answer 8

Long (selling shares that are owned) or short (selling stock that is being borrowed)

Question 9

What does selling short mean?

Answer 9

Selling securities that are not owned, but are borrowed from a BD

Question 10

What is an ECN?

Answer 10

Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes

Question 11

True or False: ECNs allow subscribers to post quotes and trade electronically and anonymously.

Answer 11

True

Question 12

True or False: Stocks found in the Pink Sheets are often thinly traded.

Answer 12

True

Question 13

According to NYSE rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for ______ minutes.

Answer 13

According to NYSE Rules, if the S and P 500 falls by 7% from the previous day’s close, trading will halt for 15 minutes.

Question 14

If the S&P 500 falls by 20% from the previous day’s close, trading halts for ________________________.

Answer 14

If the S andP 500 falls by 20% from the previous day’s close, trading halts for the remainder of the day.

Question 15

Individuals must register with the SEC within __________ of becoming an insider.

Answer 15

Individuals must register with the SEC within 10 days of becoming an insider.

Question 16

___________ is the settlement for cash transactions (also referred to as cash trades or cash settlement).

Answer 16

Same day is the settlement for cash transactions (also referred to as cash trades or cash settlement).

Question 17

How is a firm acting if it effects trades on behalf of its customers, without taking the other side of the trade?

Answer 17

Agent or broker

Question 18

A DMM holds two orders: Buy 100 ABC at 55 stop and Buy 500 ABC at 52.50. Which would be reduced on ex-dividend?

Answer 18

The buy limit order (Buy 500 ABC at 52.50), since it is the one entered below the market.

Question 19

Any quote qualified by the terms “subject”, “workout,” or “nominal” is not considered a ______ quote.

Answer 19

Any quote qualified by the terms “subject”, “workout” or “nominal: is not considered a firm quote.

Question 20

How long will a Day Limit order remain on the Display Book?

Answer 20

Until executed or the end of the day (if unexecuted)

Question 21

True or False: Nasdaq is a securities exchange registered with the SEC.

Answer 21

True

Question 22

A BD is ready to issue a favorable research report. What must exist for the BD to continue regular trading operations?

Answer 22

Effective information barriers must be in place.

Question 23

__________ is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

Answer 23

Capping is a manipulative activity that is designed to keep the price of a stock from rising (and is prohibited).

Question 24

Name two prohibitions that relate to being an insider.

Answer 24

1. No shorting of the stock and 2. No keeping of short-swing profits

Question 25

Transactions effected on an exchange or OTC must be reported within ____ seconds.

Answer 25

Transactions effected on an exchange or OTC must be reported within 10 seconds.

Question 26

What rules must DMMs follow when trading for their own account?

Answer 26

DMMs may compete as market participants. The specialist, which preceded DMMs, could not compete.

Question 27

Firms acting in the capacity of a broker will collect a ____________.

Answer 27

Firms acting in the capacity of a broker will collect a commission.

Question 28

What does Level III Nasdaq give market makers the ability to do?

Answer 28

Change their quotes

Question 29

What is the criminal penalty for insider trading by corporations?

Answer 29

$25 million per violation

Question 30

What is the system that provides quotes for the Third Market?

Answer 30

Consolidated Quotation System (CQS)

Question 31

To what is a firm entitled when acting in the capacity of a principal or dealer?

Answer 31

Markup when selling to a customer and markdown when buying from a customer

Question 32

"For insider trading violations, the SEC can sue for treble damages." What does that statement mean?

Answer 32

The SEC can sue for three times the damage (profit made or loss avoided).

Question 33

What is the Nasdaq Market Center Execution System?

Answer 33

The automated quotation and execution system for Nasdaq

Question 34

The ______________ is where trades occur between institutions without the use of BDs.

Answer 34

The Fourth Market is where trades occur between institutions without the use of BDs.

Question 35

When must insiders report their transactions?

Answer 35

Within 2 business days of the trade

Question 36

Market makers must report trades within _____ seconds.

Answer 36

Market makers must report trades within 10 seconds.

Question 37

When must dealer-to-dealer confirms be sent?

Answer 37

Next business day (T + 1)

Question 38

Is interpositioning an acceptable practice?

Answer 38

No, it is generally prohibited.

Question 39

According to NYSE rules, if the S&P 500 falls by 13% from the previous day's close, trading will halt for ____ minutes.

Answer 39

According to NYSE rules, if the S andP 500 falls by 13% from the previous day's close, trading will halt for 15 minutes.

Question 40

A BD is ready to issue a favorable research report. Information barriers must exist between what two departments?

Answer 40

Trading and research

Question 41

If an order has been entered as Immediate-or-Cancel (IOC), is a partial execution acceptable?

Answer 41

Yes. The order must be executed immediately, but not completely.

Question 42

Order is entered to buy 5,000 RST at 97 stop-limit. Trades occur at 96.99...97...97.02...97.05. Execution price is:

Answer 42

There is no execution, since no trade occurring after the trigger satisfied the buy limit at $97.

Question 43

If an investor is long stock, a sell stop order can be used to limit ___________ risk.

Answer 43

If an investor is long stock, a sell stop order can be used to limit downside risk.

Question 44

What is interpositioning?

Answer 44

The placement of another BD between a customer and the best market

Question 45

Which level of Nasdaq will only show the inside market for a security?

Answer 45

Level I

Question 46

What type of order gives discretion as to price and time of execution?

Answer 46

Not Held

Question 47

Order is entered to buy 500 RST at 97 stop-limit. Trades occur at 96.97...96.99... 97...97.02...97.05. Trigger price is:

Answer 47

$97 (at the stop price)

Question 48

The ___________________________ is the primary system for accessing the quotes of Nasdaq market makers.

Answer 48

The Nasdaq Market Center Execution System is the primary system for accessing the quotes of Nasdaq market makers.

Question 49

What is the violation for a market maker failing to honor its firm quote?

Answer 49

Backing away

Question 50

If a stop order is activated, at what price will the trade be executed?

Answer 50

The next trade after activation.

Question 51

What orders may be placed in the Designated Market Maker's (Specialist's) Book?

Answer 51

Stop and limit orders placed away-from-the-market

Question 52

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.

Answer 52

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.

Question 53

Define an insider. 5

Answer 53

1. Officers, 2. directors, 3. partners, 4. greater than 10% owners, and 5. immediate family members of all listed

Question 54

_________________ means the DMM is guaranteeing a price on a public order for a floor broker.

Answer 54

Stopping stock means the DMM is guaranteeing a price on a public order for a floor broker.

Question 55

What are the three orders that are reduced on the ex-dividend date?

Answer 55

1. Buy Limits, 2. Sell Stops, and 3. Sell Stop Limits (unless marked DNR)

Question 56

Do stop orders guarantee a specific price when buying or selling?

Answer 56

No, stop orders execute at the market price (which is uncertain) once they are activated.

Question 57

Order is entered to sell 100 ABC at 50 stop. Trades occur at 50.10...50.03...50...49.98...49.90. The execution price is:

Answer 57

$49.98 (the next trade after the trigger is touched)

Question 58

What regulation prohibits an issuer from disclosing material non-public information to securities professionals?

Answer 58

Regulation FD (Fair Disclosure)

Question 59

True or False: Investors generally place stop orders to limit a loss or protect a profit on a stock position.

Answer 59

True

Question 60

What is the trade reporting system for Nasdaq securities?

Answer 60

Trade Reporting Facility (TRF) - formerly the Automated Confirmation Transaction system (ACT)

Question 61

What can be found on Level II Nasdaq?

Answer 61

Current quotes of all market makers for a specific security

Question 62

Under FINRA rules, market makers are required to report trades in what types of securities? 4

Answer 62

1. All Nasdaq securities, 2. Nasdaq-listed convertible bonds, 3. CQS securities, 4. OTC equities

Question 63

Where may quotes for non-Nasdaq (OTC equity) stocks be found?

Answer 63

Pink Sheets or the OTC Bulletin Board

Question 64

What are the three categories of Nasdaq issues?

Answer 64

Nasdaq Global Select, Nasdaq Global Market, and Nasdaq Capital Market securities

Question 65

What is the purpose of an information barrier between trading and research departments?

Answer 65

To prevent the trading department from learning of an impending report about a stock in which the firm has a position

Question 66

Stop orders become _________ orders once they are triggered/activated.

Answer 66

Stop orders become market orders once they are triggered/activated.

Question 67

True or False: Level III Nasdaq is available to the public.

Answer 67

False. Level III is exclusively for market makers.

Question 68

The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.

Answer 68

The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.

Question 69

How long will a GTC Limit order remain on the Display Book?

Answer 69

Until executed or cancelled by the customer

Question 70

What are some of the different functions of Designated Market Makers?

Answer 70

Maintaining liquidity and buying and selling from their own account

Question 71

On the floor of the exchange, the _____ maintains a fair and orderly market.

Answer 71

On the floor of the exchange, the DMM maintains a fair and orderly market.

Question 72

How is a firm acting if it is trading for, or from, its own inventory?

Answer 72

As a principal / dealer

Question 73

_____________________________ routes orders directly to the DMMs on the NYSE floor.

Answer 73

The Super Display Book System routes orders directly to the DMMs on the NYSE floor.

Question 74

What must be implemented to limit the flow of communication between research and investment banking departments?

Answer 74

Information barriers

Question 75

The highest bid and the lowest offer for a security is referred to as the ________________.

Answer 75

The highest bid and the lowest offer for a security is referred to as the Inside Market.

Question 76

List some of the information to be included on municipal dealer-to-dealer confirmations. 7

Answer 76

1. Description, 2. call features, 3. yield/price, 4. final dollar amount, 5. confirming/contra party, 6. trade/settlement dates, 7. CUSIP #

Question 77

Order is entered to buy 2,000 XYZ at $73 stop. Trades occur at 72.95...72.99...73.02...73.08... 73.12. Trigger price is:

Answer 77

$73.02 (through the stop price)

Question 78

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

Answer 78

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

Question 79

Which market is the decentralized, negotiated market?

Answer 79

The over-the-counter market (OTC)

Question 80

The ______________ is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.

Answer 80

The third market is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.

Question 81

Order is entered to buy 800 XYZ at $73 stop. Trades occur at 72.95...72.99...73.02...73.08... 73.12. Execution price is:

Answer 81

$73.08 (the next trade after the trigger is touched)

Question 82

True or False: Super Display Book accepts market orders, limit orders, and both round-lot and odd-lot orders.

Answer 82

True

Question 83

True or False: Stop-limit orders are guaranteed execution if the trigger is touched.

Answer 83

False. Stop-limit orders may not be executed if the limit price cannot be met.

Question 84

Stop-limit orders become ________ orders once they are triggered/activated.

Answer 84

Stop-limit orders become limit orders once they are triggered/activated.

Question 85

On the floor of the exchange, who executes orders for the clients of their firm?

Answer 85

The Floor Broker (also called the Commission House Broker)

Question 86

A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

Answer 86

A limit order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.

Question 87

What is the trade reporting system for OTC equities?

Answer 87

Over-the-Counter Reporting Facility (ORF)

Question 88

__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

Answer 88

Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).

Question 89

An investor's strategy is __________ when effecting a short sale.

Answer 89

An investor's strategy is bearish when effecting a short sale (If stock falls, investors may buy back at a lower price).

Question 90

What are treble damages?

Answer 90

The civil penalty for insider trading, which is three times the profit made or loss avoided

Question 91

If a stop-limit order is activated, at what price will the trade be executed?

Answer 91

The next trade that satisfies the limit price. Not receiving execution is possible.

Question 92

May the Designated Market Maker (Specialist) accept a not held order?

Answer 92

No

Question 93

What will a firm establish between departments to restrict the flow of potential insider information?

Answer 93

Information barriers

Question 94

What does DNR mean, and when is it used?

Answer 94

Do Not Reduce; used when a client does not want their Buy Limit, Sell Stop or Sell Stop-Limit reduced on ex-dividend.

Question 95

A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.

Answer 95

A market order indicates quantity, security, and whether to buy or sell and is executed at the best price available.